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How does personal bankruptcy impact a 401(k) plan?

When saddled with overwhelming debt, a North Carolina resident will likely consider his or her options for relief. One of the options he or she may consider is filing for bankruptcy. While many people consider this debt relief process as less than ideal, it can help individuals get their financial affairs back on track and have a more positive financial future. Of course, personal bankruptcy can have considerable impacts on one's finances and credit record, and parties may have concerns when it comes to their 401(k) plans.

Fortunately, during bankruptcy proceedings, funds in a 401(k) retirement account typically remain out of reach from creditors. Federal protections work to ensure that such assets do not fall into disarray in times of financial difficulty. The Employee Retirement Income Security Act is the main law that allows retirement funds to remain as secure as possible, though the exact measure of security can depend on specific conditions.

Additionally, a person's 401(k) account could lose funds if the Internal Revenue Service is among his or her creditors. The IRS could withdraw funds from this account if an individual owes back taxes. Though this type of monetary retrieval method typically falls low on the list of options, parties may wish to remember that the possibility for losing some of those funds does exist.

Understanding the potential effects of personal bankruptcy may help individuals better determine whether utilizing this method is in their best interests. Bankruptcy can offer many benefits to North Carolina residents who are facing significant financial struggles due to overwhelming debt. If retirement accounts or other investments are a concern, individuals may wish to take their questions to experienced attorneys who could provide reliable information.

Source: fool.com, "Can Creditors Seize My Investments During Bankruptcy?", Sarah Szczypinski, July 19, 2017

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